Confronting Corruption: Advice from the Front Lines

On Feb. 6, at the request of the White House, the Berkeley-Haas Center for Responsible Business will host one of four regional dialogs on President Obama’s call for a National Action Plan on Responsible Business Conduct for US companies operating abroad.

One issue high on the agenda will be how US corporations confront corruption and bribery, a problem that can be pervasive in some countries.

How does a corporation deal with demands by a government official for “speed money” to get a license issued or a permit renewed? What about a politician who demands money to settle a labor dispute he helped engineer? How does a company combat internal corruption, such as employees who demand kickbacks from vendors?

Ravi Venkatesan, a former chairman of both Microsoft India and Cummins India, offers tough-minded insights on exactly these kinds of problems in a recent article for the McKinsey Quarterly.

“The hardest issues for ethical multinationals…are rarely the big-ticket scandals and scams that make the headlines,’’ Venkatesan writes. “Rather, it’s the subtler and more pervasive forms of fraud and corruption, such as pressures for payments on routine transactions.”

He calls these the “quiet killers of ethical business practices,’’ and warns that small and seemingly innocuous lapses can snowball into very big problems if they become viewed as just the cost of doing business. Corruption breeds more corruption, which is bad in itself for a corporation, but it also exposes companies to political backlash and prosecution by the host country as well as by the United States.

Indeed, the US Justice Department and the Securities and Exchange Commission have stepped up prosecutions under the Foreign Corrupt Practices Act. The government collected $635 million in penalties under the FCPA in 2013, and in 2014 two of the biggest FCPA settlements of all time: $772 million from Alstom SA and 384 million from Alcoa, both for alleged bribery in Bahrain.

You may not be surprised at Venkatesan’s broad conclusion: the best way for corporations to protect themselves is by going well beyond the letter of the law and establishing a culture of ethics from the top down.

But Venkatesan offers a number of shrewd insights and practical tips for dealing with demands for bribes and “speed money,” extortionists who make threats against companies, and corrupt employees inside the company itself.

The first step, he argues, is that a corporation’s CEO and other top leadership send an utterly unambiguous message about what does and does not constitute acceptable practice and about enforcement.

That means establishing a detailed code of conduct, and making sure that everyone inside the company understands it. It means making a sufficient investment in compliance, especially in countries where corruption is widespread. And it means taking swift and firm action against managers who either violate the rules or turn a blind eye. (A fraud survey by Ernst and Young found that only 35 percent of companies had taken action against employees.)

Venkatesan acknowledges that resisting corrupt demands can entail real costs: lost business, approvals that take more time, angry government officials. To that end, he offers practical advice.

*If a company’s local CEO faces demands by a politician who makes “credible threats,” such to stir up a violent labor confrontation, he or she should not deal with the problem alone. Country managers should discuss it with their global chief executive and the legal counsel at headquarters. They should also have a strong network of local advisers, perhaps even a special board of advisers who know the landscape.

*Don’t assume you have to capitulate. ”Bear in mind that extortionists are usually solo actors without institutional backing: it is often possible to call their bluff, which, in my experience, helps a company cultivate a reputation for honesty and acts as further protection against future demands.”

In some countries, Venkatesan acknowledges, it is almost impossible to carry out routine business without running into demands for “speed money” or grease payments. This often spawns industries of “facilitators” who act as intermediaries for making payments.

“Almost no one will officially admit to paying speed money, but the uncomfortable reality is that there may be no alternative for a business that needs to keep operating,” he writes.

If a company can’t avoid hiring a “facilitator,” Venkatesan urges it to be clear at the highest levels about what is happening. The company should make sure the intermediary is providing a real service, beyond making payments. Second, it should explicitly account for every payment to an intermediary and have all transactions vetted by legal experts at the company’s global headquarters. “From the perspective of the multinational,” he writes, “nothing should be under the table.”

Venkatesan also cautions companies against under-investing in compliance or skimping on compliance staff.

Compliance enforcement is a cost-generator, not a profit generator. But even companies that are serious about ethics may allocate money for compliance on a rigid formula, such as a particular ratio of the business unit’s revenues. That formula may be appropriate for operating in Germany or Switzerland, but it may be woefully inadequate for an emerging economy where corruption is more endemic.

Ultimately, it’s up to a corporation’s top executives at the global headquarters to establish a culture and a track record of uncompromising ethical compliance. Indeed, a reputation for rejecting bribery demands can go a long way to inoculating a company against them.

“CEOs must ensure that every employee in every part of the world is utterly clear about what conduct is acceptable and what is not,’’ he writes. “Over time, people will know what is acceptable here and what’s not. Social memory is many times more effective than a bunch of policies.”

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